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El Nino Is Going to Create a Powerful New Economic Storm

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More terrible news arrives just when you believed it was safe to anticipate that interest rates will shortly peak. According to both the Australian Bureau of Meteorology and the US National Oceanographic and Atmospheric Administration, the El Nino weather phenomena appears to be back. Particularly in the southern hemisphere, it frequently causes or makes worse floods, extreme temperatures, water shortages, and wildfires. These cause inflationary losses in infrastructure and agriculture, which puts stress on central banks to tighten their monetary policy. Supply shocks will embed if climate change let such events more powerful and frequent.

El Nino of this year is expected to set new records. When the eastern and central Pacific Ocean's surface temperature rises by at least 0.5 degrees Celsius above average, weakening or reversing the direction of the trade winds, the phenomena is produced. The strongest one to date occurred in 2016, when the sea temperature at the sea surface reached 2.6 degrees Celsius above average; this November, according to Australia's top meteorologists, that level might reach 3.2 degrees Celsius.

Traders have thus far concentrated on a few of the commodities that are most likely to be impacted. With the exception of a 2020 pandemic rise, rice futures reached a nearly 15-year high in June. The three biggest exporters of this food item, India, Thailand, and Vietnam, have already this year seen record-breaking or nearly record-breaking high temperatures and often experience hotter, drier weather as a result of El Nino. Thai authorities urged farmers to sow just one crop this year rather than two in May in the anticipation of water constraints. Vietnam has already experienced drought circumstances, which have had an impact on robusta coffee tree output. The nation is the largest producer and exporter of the bean, which is used to make instant coffee and accounts for 15% of Italian espresso mixes. The robusta futures contract, which has increased 60% this year, achieved its highest price last week since it was first offered in 2008.

A single El Nino episode could appear controllable in the estimation. The International Monetary Fund projected in 2015 that it can increase the price of oil by approximately 14% and non-fuel products by over five percent within a year following an incident. The IMF analysts found that the largest rises in total inflation throughout a 12-month period, however, were approximately 1 percentage point and restricted to a small number of the most vulnerable nations, such Brazil, Indonesia, and Mexico. This year, researchers from the University of Dartmouth increased the time period and calculated that the 1998 El Nino, the second-strongest on record, resulted in five years of worldwide economic losses totaling $5.7 trillion in 2017 dollars.

Over time, a lot has changed. First, the planet is getting warmer: despite reduced Pacific Ocean temperature that has given birth to La Nina, the opposite of El Nino, since 2020, the eight years after the publication of the IMF research have also been the world's eight hottest on record. On the one hand, El Nino may still intensify some of the aridification that global warming has intensified in portions of China, Europe, Southeast Asia, and the US. On the other side, it fosters the circumstances for more intense downpours because the air can store 7% more water for every degree Celsius it warms. Soybeans grown in the United States, which have been severely impacted by the lack of rain, and other crops that often benefit when El Nino delivers wetter conditions now face a higher risk of being swamped.

During La Nina, Oceania experienced some of those effects. Australia's second consecutive year of flooding caused food inflation to increase at its highest rate since 2006, or an annualized rate of 9%, in the three months leading up to September 2022. In the meantime, one month after cyclone Gabrielle made landfall, the fruit as well as vegetable price index in New Zealand increased 22% year over year in March.

According to the World Meteorological Organization, there is a 98% possibility that the next five years will be the warmest period on record as a result of the release of greenhouse gases and El Nino. Policymakers are facing another powerful economic cyclone after battling an inflation storm brought on by the epidemic and the conflict in Ukraine.

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